Cryptocurrency trading strategy
What is cryptocurrency trading?
If we simplify the principle of trading cryptocurrencies on the stock exchange as much as possible, then it is no different from others. The trader tries to buy as low as possible and sell as high as possible. The same strategies apply.
Currently, several popular digital asset exchanges support fiat trading, so traders wishing to trade crypto must either fund their balance with pre-purchased crypto or trade with a brokerage company. For many traders, the second option is preferable, as it is simpler and more reliable.
It is worth noting here that when trading with a broker, a trader does not buy or sell a physical asset. The transaction is conducted with derivative instruments, which gives the right and opportunity to speculate on both the growth and fall of currencies. This opens up more room for speculation about a change in course.
Thanks to this, when working with electronic money, a trader can apply the tactics that were previously used for trading conventional instruments. Moreover, many brokerage companies allow you to work with both electronic money and traditional instruments on one account. It is very convenient.
The crypto-market covers more than 2000 assets. All of them differ from each other in terms of prices, trading volumes, capitalization and popularity. It is for this reason that not many cryptocurrencies are suitable for real trading. Low liquidity in many instruments makes short-term speculation virtually impossible.
Therefore, the vast majority of traders prefer the most popular, demanded and liquid tokens. Their list is widely known. These can be cryptocurrencies such as: Ethereum, Litecoin, Ripple, Bitcoin, Bitcoin Cash, Stellar, Cardano, IOTA, NEO, Monero and others.
If you want to trade through a brokerage company, you will not be able to trade exotic coins, as brokers only add liquid and popular instruments to the list of instruments.
Types of cryptocurrency trading analysis
In crypto trading, the most important thing is the trading strategy. Choosing the right cryptocurrency trading strategy provides you with a reliable income, while choosing the wrong one can backfire.
You can endlessly discuss different strategies, from simple “holding” to more advanced methods (like day trading), but none of them will work if you do not know how to analyze market trends.
Market analysis is extremely important for choosing the right crypto trading strategy. Sure, all those lines, numbers, and abbreviations look a little intimidating, but in general, it comes down to:
- technical analysis
- fundamental analysis
The basic principle of technical analysis is quite simple: everything repeats. Analysts who use this approach study historical market data (volume of transactions, price trends), and not the specific goals of a particular cryptocurrency or project.
They try to predict market behavior using historical data. To do this, they identify repeating patterns and then make theoretical calculations based on bullish or bearish market trends.
Technical analysis is based on the assumption that price fluctuations in the market are not random and are due to recurring trends that can be relied upon when making forecasts.
As part of technical analysis, it is necessary to take into account the supply and demand for a particular currency. Let's say you've been in a bull market for a while. This can lead to a decrease in the supply of coins due to high demand, which leads to higher prices. When prices rise, people will start selling their assets to make a profit, and this will mark the transition to a bear market. At some point, supply will exceed demand, and then prices will begin to decline. After that, the cycle repeats again.
If we compare fundamental analysis with technical analysis, then it gives a more general idea of the situation on the market. Fundamental analysis is not based on historical data, but on the intrinsic value of a particular asset, which can be found by collecting quantitative and qualitative factors.
Suppose you have found a new digital currency/project that can be used in many areas. If you believe that the price of this asset is undervalued compared to its intrinsic value, then you can invest in it and - theoretically - make a profit.
If you see that the price of an asset is too high, you can make a deal in order to capitalize on a decrease in its price. This is called short selling (short). In other words, this is a trading strategy that allows you to earn a decrease in asset prices. This strategy comes with high risks and should only be used by experienced traders.
List of main technical indicators
Let's make a reservation right away that indicators cannot predict the future with great accuracy. However, they can help a trader observe trends in order to assess their direction and strength. The logic of indicators is similar to Newton's physics: the price movement has an impulse, and the more it is, the more difficult it is to stop it (inertia); and vice versa.
Let's look at the 5 most interesting indicators that can be used when trading cryptocurrencies.
Moreover, some of the indicators we have considered can become a full-fledged cryptocurrency trading strategy.
- The first is Ichimoku Cloud. The Ichimoku Cloud indicator is a tool of five lines, each of which displays the average values for periods of time, the total length of which can be determined by the trader. When two lines intersect, the area between them is shaded like a "cloud". If the price is above the cloud, then the trend is up, and when the price is below the cloud, then the trend is down. If the cloud moves in the direction of the price, then the trend should be considered strong.
- The second indicator is the Relative Strength Index. RSI is one of the simplest signals indicating whether an asset is overbought or oversold. It uses historical data to determine the overall demand for an asset, and then calculates whether people are buying the amount of an asset that could lead to a downward price correction, or the opposite could happen. The RSI has two lines - one at the 30% level and the other at the 70% level. When the value is above 70%, then the price is likely to fall; when the value is below 30%, the price is likely to rise.
- The third indicator - Moving averages - MA. When prices fluctuate up or down, their movements can be misinterpreted as a reversal or continuation of a trend. The MA (“moving average”) indicator calculates the average price over a period of time and also recalculates it over time. Short periods of time have little effect on the MA indicator, which relies on long periods of time. Looking at a chart depicting the MA, one can identify support and resistance levels. Support is a lower "barrier" that the price is unlikely to jump over. The resistance level is the opposite of the support level - it is also a kind of barrier above the current price level, which is unlikely to be confidently overcome. Thus, the MA indicator makes it easy to see support and resistance levels.
- Fourth - Fibonacci levels. Like moving averages, Fibonacci levels are another useful tool for predicting price action. Fibonacci levels do not represent complex and interdependent calculations, but still are included in the list of indicators for the trader due to their usefulness. This indicator allows you to operate with standard levels 0; 23.6; 38.1; 50.0; 61.8; 76.4; 100. When there is a sudden change in price, Fibonacci levels allow you to track such a movement and draw certain conclusions about the behavior of the price. Many traders believe in Fibonacci levels, which are like levels of a self-fulfilling prophecy.
- Fifth - the volume of sales. Sales volume is one of the most valuable and undervalued indicators in the market. It shows how many people are buying or selling coins.
The above indicators can help you in making trading decisions or can be used by you to create your own cryptocurrency trading strategy. You can also use a huge number of other indicators that are used when trading classic trading tools.
Basic cryptocurrency trading strategies
There are two basic strategies for trading cryptocurrencies.
- The first, the most popular, is to BUY AND HOLD; such traders (Holders) are more likely to be long-term investors. Holders have bought virtual assets at a low price and are waiting for some price at which they can sell them. This mostly applies to bitcoin holders, but since bitcoin absolutely dominates the market, holders can potentially have a strong impact on the crypto asset market as a whole. For example, if it becomes obvious that cryptocurrencies have not made any revolution in finance and bitcoin will no longer grow, frustrated holders will start mass selling bitcoins.
- The second strategy is PUMPING. It is used by the owners of a large number of cryptocurrencies. They organize information stuffing that causes a stir in the market and a massive buying of cryptocurrencies in the hope of further growth, at some point the informational reason stops working and the price falls, leaving most buyers without profits. But an ordinary trader can also earn on this strategy if he successfully enters the market. The problem in this case will be time to exit the auction.
Both basic strategies are now little used, as interest in the crypto market is somewhat reduced. But it also leads to the fact that the trading of these currencies has become more orderly and more meaningful strategies can be applied in trading.
Cryptocurrency trading strategies are based on a time period or on typical market situations.
- Time strategies include, in particular, INTRADAY TRADING. According to this strategy, the trader trades during the trading day and closes all open positions by the end of it. Given the unpredictable volatility of cryptocurrencies, this strategy is very common.
- SWING trading is trading within a certain time cycle, long enough. It can be a period of price rise, price decline or a flat movement. The trader tries to determine the beginning of the movement, trades during this movement and completes transactions with the end of the cycle.
- SCALPING is a high-frequency strategy in which a trader makes deals on every fluctuation in the rate. There may be dozens of trades in one hour, but most of them are unprofitable, so the trader expects to win back losses and make a profit on a number of very profitable trades.
- Situational crypto trading strategies include, for example, PULLBACK TRADING. According to this strategy, the trader waits for the moment when the price decreases slightly (rollback) on the growing trend, and at this moment the trader buys coins, and the trend returns to growth. Conversely, on a downtrend, an upward correction occurs and here the trader sells coins, and the trend returns to the fall. Bounce trading is used on a downtrend, when a trader determines a certain minimum price, after which there may be an increase. If the trader accurately guesses this moment, then he has the opportunity to buy the currency at the lowest price.
- The IMPULSE TRADING STRATEGY implies that the trader correctly determines the beginning of the impulse, that is, the moment a clear trend is formed, either down or up. Accordingly, if a trader sees the formation of an upward impulse, he buys, but he can also buy during a trend, up to extremes, since the impulse allows you to make a profit in this way. Otherwise, the trader sells the cryptocurrency at the time of the formation of a downward impulse or along its course.
- BREAKOUT TRADING also assumes that the trader can accurately determine when the price changes. For example, on a downtrend, it tracks when the price breaks a certain price value, after which the trend reverses. At the time of the breakout, a trader can buy an asset at the lowest price within a new trend.
- Trading STRATEGY OF POSITION TRADING is that the trader only trades when the asset is in a certain position. For example, a trader enters into transactions only when the trend reverses, the trader does not consider other situations.
Try different approaches, look for your strategy. This will help you with theoretical knowledge and constant practice. Already now you can start for example with a DEMO ACCOUNT, IT'S FREE! Good luck!